This is my first post! I hope you don't mind me jumping in with my two (okay, roughly five) bits.
I agree that socketed weapons don't seem like a good idea, especially the typical "ohhh, I add ruby get fire sword!" type stuff.
Gems definitely shouldn't have automatic enchanting effects. that doesn't automatically rule out gem-encrusted weapons, though. The thing you must realize is that even if a sword was originally decorational, with a powerful enchantment it can still become a legendary and quite useful sword.
Also, it doesn't seem too bad if the gem is enchanted beforehand, and THEN used to make a magical weapon.
I don't think that relics should be automatically magical (especially if they are created by a non-magic-using dwarf), but I think the idea of each engraving on one having a chance to be magical sounds like an elegant and open-ended way to handle it, although I don't think engravings should be the only way for it to be magical.
I think that a good way to handle magical items would be to have some sort of enchanter skill (but perhaps for your dwarves to learn it, you must have an arcane loremaster noble, then once they've undergone initial training they can train their skill up by practicing enchanting items). There would naturally have to be a limit to what they could do... one of the most obvious of which would be for enchantments to fade over time. Each enchantment would have a quality rating similar to the way crafting works. Only a "masterwork" level enchant would be considered permanent until the object broke (like an artifact, except instead of a perfect item, it's a perfect enchantment). Even better, when such a dwarf became moody, instead of requiring materials, they will ask for an item to work an amazing enchantment on. For instance, one might ask for a bronze sword (or just a bronze weapon if that's too restrictive). Any item that received a relic-level enchantment would automatically be considered a relic from then on.
Based on that idea, tell me... what would be the logical result of an relic-level enchantment on a large bronze statue?